While the markets have been on a downslide since January, things have turned really bad in the last few weeks. And there might be worse to come. Sample this: The BSE Sensex was at 20,800 points in January. On October 10, it closed at 10,527 points. Almost 50 per cent of the market capitalisation has simply been wiped out.
It's not just direct investors in the stock markets that have suffered, even mutual funds investors are sitting ducks now. Many cannot find an exit route because of the continuous fall. In the last six months, anything that is closely related to equities has taken a beating.
The category average of equity diversified funds is down 28 per cent and sector funds like technology and banking are down 31.68 and 22.79 per cent respectively.
No wonder, there is complete panic among investors. There are many who would like to exit to just make sure that they reduce their losses. For lump-sum investors in mutual funds, it would be quite tempting to even book losses.
However, for investors who have taken the systematic investment plan route, it makes little sense to do so. It is often noticed that though many investors enter the market through the SIP route in a rising market, they often prefer to stop them or even redeem at a loss during a downswing.
Typically, the method used is to stop the SIPs suddenly during the middle of the tenure. Or not renewing them when the original period expires. And this is a completely disastrous decision to make, especially when you have started investment when the market was rising. Here are a few reasons:
Losing the benefit of low value: The investor, who has started a SIP in a rising market, would have got lesser units earlier. This is because a rising market implies higher net asset values of mutual funds, leading to lower units for the buyer.
The real benefit for the investors comes from the rupee-cost averaging. That is, when the market comes down, there is a fall in NAVs of funds. So that leads to more units for the investor, thereby reducing the average cost of units. For instance, if the investor is putting Rs 3,600 a month at a NAV of Rs 20, he would get 180 units.
Now, when there is a fall in the markets and, consequently, in the NAV to Rs 18, the investor can get 200 units. The benefit of the fall in prices is the only way in which the average cost of the investment can be brought down.
However, the mistake that many investors make is that they stop their investment during the downside in the market. So, while units have been purchased at a higher cost, there are no units at lower costs.
Stopping the investment is equivalent to becoming the owner of only high-cost units. It is almost like making a lump-sum investment at higher prices that keeps losing its value when the market slips.
That implies that if the market slips to a great extent and recovers really slowly, it would be a really long time before the investor is able to get good returns from their investment. On the contrary, when the average cost keeps on falling consistently with the slipping market, even if the recovery is slow, the investment will be in the green sooner than later.
Timing value: SIPs are a preferred route because of the simple fact that it is almost impossible to time the market for most investors. So when the Sensex was almost at 21,000 points this January, it would have been impossible for most to predict this sharp fall.
In those heady days, many were predicting 25,000-30,000 levels. Similarly, with the Sensex just above 10,500 now, it would be almost impossible to say if this is the bottom or worse is yet to come.
Due to this specific reason, buying low and selling high is a formula that can seldom be followed consistently. SIPs solve this problem because one does invest regularly, whether it is a high or low and expects to gain over a period of time -- usually over five to seven years or more. Timing does not matter at all and the investor does not have to worry about when to invest.
However, by stopping the SIP, the investor is actually abandoning the investment. And instead of buying at lows and selling at highs, they are reversing it -- buying at highs and selling at lows. The natural corollary is that there would be losses incurred in this investment.
Tackling this situation: The simple solution to this is that the investor must continue the investment, even if there is chaos around. Just consider it as a necessary expenditure that has to be incurred every month. And then forget about it.
Remember that for any real benefit, a SIP should be continued for at least five years. Yes, there will be agony when you get the monthly statements that show that the value of the money invested is down. But then, it is like a bitter pill that you have to take to cure an illness. Similarly, to create wealth over time, you have to go through the pains of rising and falling markets.
If you are one of the scared ones, the best way is to make 6-12 investments at one go.
Another way is to have an auto debit system, where the money is transferred from the account every month directly, instead of signing a cheque. This will also ensure that there is no disruption in the investment process.
The writer is a certified financial planner.
